C&G heads mortgage war

An aggressive pursuit of market share produced a surge in new mortgage business last year at Cheltenham & Gloucester, the building society being acquired by Lloyds Bank. But the incentives offered to borrowers cut heavily into operating profits, already under pressure in a difficult lending market. The society reported an 8 per cent rise in 1994 pre-tax profits to £219.2m. Mortgage advances rose by 40.6 per cent to £3.1bn compared with £2.2bn the previous year.

This growth was driven by C & G's strategy of keeping mortgage rates very competitive as well as offering cash-back loans and mortgages with no value or application fees. Analysts expect the price war in the market to intensify.

Halifax issued its response to these pressures yesterday by agreeing to buy the UK mortgage portfolio, worth £1.5bn, from France's Banque Nationale de Paris. The gain for the Halifax, Britain's biggest building society, is about the same as the new business won by C & G. There are estimated to be some £20bn of mortgage portfolios for sale in the UK, with many small lenders willing to cede. The Abbey National recently bought two such portfolios.

Michael Lever, analyst at Nomura, said C & G's aggressive strategy had pushed its market share to about 7.3 per cent of net new lending. But he pointed to the increased cost/income ratio of 31.9 per cent, from 26.4 per cent in 1993, incurred to achieve this higher lending volume. Although the society's provisions for bad debts fell to £32m from £76m in 1993, analysts' expectations that this would be reflected in higher profits were dashed by the increased costs of acquiring new business.

Pre-tax and pre-provision profit fell last year to £258m from £278m in 1993. C & G's tough policy fits well with statements from Lloyds which go in the same direction. Analysts expect that if the acquisition goes ahead, the society could become even moreaggressive in its bid for market share, raising the stakes in the mortgage battle.